Spain moves toward full EU bailout

Civil servants protest against government austerity measures in front of the headquarters of Spain’s center-right People’s Party in Madrid on Thursday.

Photo: Reuters

Spanish Prime Minister Mariano Rajoy inched closer on Friday to asking for an EU bailout for his country, but said he first needed to know what conditions would be attached and what form the rescue would take.

His comments, at his first post-Cabinet meeting news conference since taking office in December, came a day after the European Central Bank (ECB) signaled it was preparing to buy Spanish and Italian bonds but only after EU bailout funds were triggered and countries had asked for help.

A source said separately that Spain would not decide whether to apply for several weeks.

Buying bonds and providing aid would all be designed to bring down what have been prohibitive borrowing costs in the indebted countries.

Rajoy said he was ready to do what is best for Spain, going far further than he did on Thursday when, during a press appearance with Italian Prime Minister Mario Monti, Rajoy three times declined to say whether he would seek the aid.

“I will do, as I always do, what I believe to be in the best interest of the Spanish people,” Rajoy said on Friday.

“We still don’t know what these measures are,” he said, a reference to a comment by ECB President Mario Draghi that the bank was examining non-conventional measures to defend the eurozone’s currency.

“What I want to know is what these measures are, what they mean and whether they are appropriate and, in light of the circumstances, we will make a decision, but I have still not taken any decision,” he said.

A source familiar with Rajoy’s thinking confirmed this possibility was actively looked at and that Rajoy was ready to bear the political cost of a request.

In a letter to European Council President Herman Van Rompuy on Friday, Rajoy urged the president of the European Council to work toward creating a eurozone-wide banking and fiscal union as soon as possible.

He said he believed that the outline for a single supervisory system for the banking sector should be ready before the end of this year.

Rajoy added he believed granting the European Stability Mechanism, a permanent bailout fund, a banking licence would allow it to tap almost unlimited funds from the ECB.

Draghi on Thursday said the fund was legally barred from tapping the central bank for funding.

“In any case, whatever mechanism is put into place should be an umbrella mechanism, one that is applied equally to all the countries that meet its requirements,” Rajoy said in the letter. Spain has already asked for aid for its stricken banks.

“People have said the main reason why he is not seeking help is because he is too proud, but this is not true. He requested an assistance for the banks because it was the adequate instrument to solve a specific problem. There is no opposition to do it again,” the source said.

An aid request would entail negotiating a memorandum of understanding with other eurozone countries and would likely bear strong conditionality, something Rajoy wants to discuss in detail before moving forward.

Although Spain is complying with stringent EU and IMF demands to reform its economy and announced a package of 65 billion euros (US$79 billion) of tax hikes and spending cuts last month, the government fears it could now be asked to reform further the pension system.

The measure is the last campaign pledge Rajoy has not been forced to break so far and could undermine even more the support for the government after it already fell sharply in recent weeks as hundreds of thousand of Spaniards took the streets to protests against austerity steps.